Prorations are calculated by determining the daily rate of an expense and multiplying by the number of days each party is responsible. The two common methods are the 365-day method (actual days) and the 360-day method (banker's year). For taxes paid in arrears, the seller credits the buyer for unpaid taxes. For taxes paid in advance, the buyer credits the seller for the prepaid period after closing.
Annual property taxes of $3,650 are paid in arrears. Closing is March 15 (seller owns the day). Daily rate = $3,650 / 365 = $10/day. Seller owes for January 1 through March 15 = 74 days. Seller credits buyer 74 x $10 = $740 at closing.
Always identify three things first: the annual amount, whether paid in arrears or advance, and who owns the day of closing. For arrears, the seller credits the buyer; for advance payments, the buyer credits the seller. Practice these calculations before exam day.
Related Terms
Related Concepts
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual interest is the total amount of interest charged on a loan or investment over a year.
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